AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings downgrades the following West Oso Independent School District, Texas' (ISD; the district) outstanding unlimited tax (ULT) bonds:
--$485,000 in outstanding ULT bonds, series 2004 to 'A' from 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable and secured by an unlimited ad valorem tax pledge levied against all taxable property within the district. The bonds also carry a guaranty provided by the Texas Permanent School Fund.
KEY RATING DRIVERS
DIMINISHED FINANCIAL CUSHION WITH FURTHER DRAWS ANTICIPATED: Reserves and liquidity remain adequate, although down from higher, historical levels due largely to a trend of unbudgeted, pay-go capital spending. The downgrade to 'A' from 'A+' reflects management's near-term expectations of further draws on a much reduced financial cushion while steps toward restoring the district's financial flexibility remain unclear.
ABOVE-AVERAGE TAX BASE CONCENTRATION: Annual taxable assessed value (TAV) gains have historically been volatile and the tax base remains susceptible to changes in commercial/industrial inventory. Taxpayer and sector concentration is high.
BELOW-AVERAGE SOCIO-ECONOMIC INDICATORS: Population and enrollment trends in the district are relatively stagnant. Income/wealth and educational attainment metrics are well below average.
FAVORABLE REGIONAL ECONOMY: The district benefits from its location in the larger, moderately diverse employment and economic base of the Corpus Christi, Texas metropolitan statistical area (MSA). Unemployment on a year-over-year basis is trending downwards.
MIXED DEBT AND OTHER LONG-TERM LIABILITIES PROFILE: Overall debt levels are high. Carrying costs are low due in part to some state support for the district's debt and the below-average amortization of outstanding tax-supported debt. Capital needs appear manageable; management has no near-term debt plans.
RATING SENSITIVITIES
Further, material deterioration of the district's financial reserves would likely lead to negative rating action.
CREDIT PROFILE
CORPUS CHRISTI METRO DISTRICT
With one-third of its district located within Corpus Christi city limits, West Oso ISD encompasses almost 50 square miles and approximately 9,300 individuals in a largely commercial/industrial area. Income/wealth levels are below average, falling about 20% below those of the MSA and 30% below those of the state. Population and enrollment trends have remained relatively flat. As measured by average daily attendance, the district's enrollment base has hovered at just under 2,000 students.
REDUCED FINANCIAL FLEXIBILITY
The downgrade to 'A' from 'A+' largely reflects Fitch's concerns that the district's financial position has weakened and management has no clear plans as to restoring reserves and liquidity levels. There is no formal fund balance policy, but in the past, Fitch took comfort from the district's adherence to its informal target of 2 -- 3 months of spending. However, recent balances have been well below this level and further drawdowns for pay-go capital spending appear probable beyond the current fiscal year. Management does not anticipate rebuilding reserves until various near-term pay-go capital projects are completed; however, further opportunities for spending on capital needs are likely. In general, Fitch views pay-go capital spending favorably, but recognizes that it must be balanced against maintaining sufficient operating financial flexibility.
Operations are largely funded by state aid (about 60%) in this property-poor district, followed by property taxes. Fluctuations in taxable values have minimal impact on operating revenues. As defined by the school funding formula, additional state aid offsets losses in property tax revenues, which allows for stable per-pupil funding levels. Management maintains some revenue flexibility with the ability to ask voters to increase the operating tax rate up to an additional $0.13 per $100 TAV, but has no plans to do so.
Historically, reserve levels have been strong and stable at no less than 28% of spending over fiscals 2006 - 2010, but the district's financial position as characterized by its reserves and liquidity began to weaken somewhat in fiscal 2011. The year's drawdown was $1.1 million after utilizing some fund balance for pay-go capital spending. Nonetheless, the unrestricted fund balance totaled a solid $4.6 million or 24% of spending at fiscal 2011 year-end. The only modest decline in unrestricted balance was due in part to the reclassification of balances pursuant to GASB 54.
For fiscal 2012, budgeted spending and staffing levels were reduced given management's efforts to address state funding cuts of at least $1 million. The year's operating budget was adopted with a larger than usual $460,000 draw on reserves. However, actual financial performance fell below budgeted expectations due largely to unbudgeted, pay-go capital spending approved by the Board for various projects; the year's net operating deficit increased to just under $2 million. Also, the budgeted savings from reduced staffing were not fully realized as some of the previous vacancies were filled mid-year. Unrestricted general fund reserves totaled a lower but adequate $2.6 million or 14% of spending at year-end fiscal 2012. Liquidity fell as well and general fund cash/investments totaled $1.9 million, which equaled slightly over one month of spending, down from a recent high of $5.2 million in fiscal 2010.
Less favorable financial performance as compared to budget is again expected in fiscal 2013 according to management's projections. A modest drawdown was included in the adopted $18.2 million operating budget (which increased about 8.5% from tight 2012 adopted budget). Management indicates expenditures are running at a normal level, although a larger, $400,000 drawdown at year-end is preliminarily expected given further spending on technology and campus improvements, which would leave general fund reserves at $2.2 million or about 12% of spending. Fitch believes this level of reserves is weak for a small district with a below-average economy and limited overall resources. In addition, Fitch believes further erosion is possible if not likely, given that management has not made maintenance of targeted revenues a priority.
TEXAS SCHOOL DISTRICT LITIGATION
In February a district judge ruled that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels'. The judge also cited inadequate funding as a constitutional flaw in the current system.
Fitch will monitor the appeal process of the suit, which may go directly to the state supreme court. If the court upholds the lower court ruling, the state legislature will be directed to make changes to the system to restore its constitutionality. Fitch would consider any changes that include additional funding for schools a positive credit consideration.
REGIONAL ECONOMY STRENGTHENS
The district is part of the broader Corpus Christi MSA; the city is the eighth largest city in Texas and serves as the regional economic center for a 12-county area. Much of the area's recent economic expansion revolves around the large downstream petrochemical industries, refineries, associated oil/gas support industries, and shipping/port activity that have traditionally anchored the economy. In addition, Fitch notes economic activity in the MSA is generally up given its historical economic strength in the energy sector and proximity to the large and recently productive Eagle Ford Shale oil/gas play occurring in neighboring counties.
Evidence of economic expansion is apparent in area unemployment levels. On a year-over-year basis, unemployment in the MSA fell to 5.7% in December 2012, which was down from 6.9% as of December 2011 (due in part to a modest decline in labor force), remaining below the state and U.S. rates of 6.0% and 7.6%, respectively.
TAV GAIN IN CONCENTRATED TAX BASE
The district's tax base is predominately commercial/industrial in nature and has realized average annual gains of nearly 4% since fiscal 2008 although year-to-year results are volatile. For fiscal 2013, TAV has a strong gain of nearly 15% after the prior year's decline of 3%. These TAV fluctuations reflect much of the inherent volatility in the district's tax base due largely to changes in industrial inventories (contributing about 40% of TAV in fiscal 2013). In total, about 65% of TAV comes from commercial/ industrial property; residential values contribute only 20%.
Totaling nearly $610 million in market value as of fiscal 2013, tax base concentration is high at 20%, with the largest taxpayer at 7%. Nearly all of the top 10 taxpayers are in the energy sector, specifically oil and gas, along with associated support industries. Over the near term Fitch believes further, at least modest, TAV gains are likely, consistent with the improving levels of economic activity in the area.
OVERALL DEBT LEVELS HIGH; OTHER LONG-TERM LIABILITIES MANAGEABLE
The overall debt burden is high and approximates 7.4% of market value and $5,600 per capita before consideration of some state support of the district's debt due to its low property wealth. The district's direct debt profile is largely fixed-rate debt with modest use of capital appreciation bonds. Principal amortization is below average with 45% retired in 10 years. Capital needs appear manageable given flat to stable enrollment trends, capacity in existing facilities, and typically annual pay-go capital spending. Management has no near-term debt plans.
The district's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the district provides the bulk of the employer's annual pension contribution. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions.
Carrying costs for the district (debt service, pension, OPEB costs, net of state support) are low at 9.2% of governmental fund spending in fiscal 2012, assisted by annual state support of the district's debt and partially reflective of the below-average amortization. Over the near-term, Fitch expects carrying costs to remain at the lower end due to the relatively flat annual debt service projected over the amortization schedule.
Additional information is available at 'www.fitchratings.com'.The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope and Case-Shiller Index.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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